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Thoughts on the Market: Daily Summaries Delivered
by Morgan Stanley
Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.
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- Yesterday4 min
Midterm Election Results: Three Key Takeaways
Democrats delivered a stronger-than-expected performance in the midterms. Our Head of Public Policy Research Ariana Salvatore examines what the results could mean for Washington’s policy priorities, the balance of political power and the investment landscape.Read more insights from Morgan Stanley.----- Transcript ----- Ariana Salvatore: Welcome to Thoughts on the Market. I’m Ariana Salvatore, Head of Public Policy Research at Morgan Stanley. Today, I'll be talking about the results of the U.S. midterm elections: what the Democratic party's stronger than expected performance means for Washington, and how investors should be thinking about the implications. It's Wednesday, November 4th, at 10am in New York. Yesterday's elections delivered a much stronger result for Democrats than most had anticipated. Beyond the headline outcomes, Democrats expanded their margins in traditionally Republican areas and demonstrated a level of competitiveness in places that would've seemed unlikely just a few months ago. But for investors, the more important question is what these results actually change from a policy perspective. We see three main takeaways.First, the near-term market reaction has been somewhat complicated, particularly around the AI trade. Our U.S. equity strategists have flagged the midterms as a clearing event, although a larger Dem sweep than what was expected could introduce a little bit of volatility. Now last night, we saw a fairly clear risk-off response. Treasury yields moved lower, the dollar weakened, and equity futures declined. One of the biggest areas in focus was Texas, where the governor's flip raised questions around potential restrictions on data center development and what it could mean for the broader AI trade. That's an important issue given how central access to power, permitting, and geography have become to the AI investment thesis. But we think it's important to distinguish between political ambitions and the ability to actually implement them. In Texas, for example, the incoming Democratic governor would still face a Republican-controlled state legislature. That, in essence, limits the scope for some of the more ambitious changes that require legislation pertaining to tax policy or empowering local communities to negotiate. Of course, that doesn't eliminate the policy risk, particularly through executive and regulatory channels. But it does suggest that some of the more aggressive scenarios that investors initially contemplated may be difficult to implement. Second, we don't think the election fundamentally changes the direction of several executive-led policy areas, including deregulation. We've been expecting a pull forward in M&A activity early next year, and that remains our view. Politics are, of course, not the only factor. Economic conditions, the rates backdrop, and CEO confidence all matter. But the Trump administration continues to be perceived as favorable toward deal-making, and the agencies responsible for reviewing transactions remain central to that process. The difference is likely to be a greater degree of congressional oversight. That can create headlines and add some additional uncertainty, but it's worth distinguishing between congressional scrutiny via things like investigations and hearings and actual regulatory authority. Ultimately, the agencies still drive merger approvals and financial sector deregulation, and we don't think the election meaningfully reverses that trend. Third, the legislative implications are likely to be more limited than the political rhetoric might suggest. We've been anchoring investors to what we call our cohesive Democratic majority scenario. Under that framework, the most consequential potential legislative change is a delay in the implementation of the SNAP and Medicaid spending reductions under the One Big Beautiful Bill Act. We think that could present a modest upside risk to our growth forecast to the extent that maintaining those benefits supports household spending. Beyond that, we think the next two years will be characterized by considerably more political noise than substantive legislative change. And remember, the president is the story for markets. Executive-led authorities around tariffs, geopolitics, deregulation, and export controls have all been the key factors for markets. So, what's the bottom line for investors? We think the election delivered a more substantial political shift than anticipated, but the market and policy implications are more nuanced. For AI, the focus should remain on the distinction between state-level
- Yesterday9 min
Solving AI’s Power Bottleneck
Our analysts Andrew Percoco and David Arcaro break down how AI’s surging energy demand could reshape the way we produce, store and use power. Read more insights from Morgan Stanley.----- Transcript ----- Andrew Percoco: Welcome to Thoughts on the Market. I'm Andrew Percoco, Morgan Stanley's U.S. Autos and Shared Mobility analyst. David Arcaro: And I'm Dave Arcaro, Morgan Stanley's U.S. Power, Utilities, and Clean Tech analyst. Andrew Percoco: Today, why the AI power crunch could transform how we generate, store, and consume electricity. It's Tuesday, November 3rd, at 10am in New York. Andrew Percoco: So Dave, the whole AI power shortfall and, you know, how data centers [are] creating a power crunch is not necessarily a new topic. I think we've had many conversations, many people listening have probably heard this is, kind of, being a bottleneck for AI deployment. But I'm curious, how have your views around the role of distributed power changed in terms of its role in solving some of the shortfalls in the market? I think there's a lot of debate in the industry around whether or not these solutions are "bridge." Or whether they're structural and they can be truly long-term sources of supply to the market. So maybe just help us think about, you know, how our views have really changed, as it relates to distributed power specifically. David Arcaro: One of the things that we have seen is that the shortfall has grown in our estimates over the last several iterations. We're now looking at upwards of an 80 gigawatt shortfall by 2029. And how do we solve that? Well, I'd say we've leaned more into on-site power, bringing your own power. What is that? You know, if you are still waiting for years for a grid connection from the utility, what can you do as an alternative? You can bring your own power. You could bring small scale power equipment to get the high reliability in a much faster timeframe than you would waiting for the grid in comparison. And so we're seeing that increasing extremely rapidly in popularity among hyperscalers and data center developers. And we're seeing them much more, being willing to consider it on a long-term basis. What used to be, "Hey, I need to cover a few years just to bridge until I have line of sight to getting a connection to my utility…" Now we're seeing actually 15, 18, 20-year contracts for these, you know, what used to be considered just smaller scale, less attractive solutions. They're now long-term, with what looks like much more permanent considerations for highly reliable data center AI power. Andrew Percoco: I think there's a preconceived notion in the market that the grid's going to catch up; and that we won't need these solutions longer term. Or that we're building too much of it and there's too much manufacturing capacity coming to the market. So maybe we can segment those into two separate questions. Like one, what is actually the bottleneck? I think everyone thinks of it as a power generation bottleneck. But I think you've done some interesting work around how there's also transmission and distribution bottlenecks that don't get solved as quickly as the power generation. So maybe you can talk to that. But then secondly, when we think about the long-term, you know, case for distributed power. Are there certain types of technologies that maybe screen better or more favorably? Or certain characteristics of certain technologies that screen more favorably when you think about this being a structural source of power rather than maybe a short-term fix? David Arcaro: Yeah. The bottleneck is very often in the utility space. Utilities are seeing such an unprecedented demand for electricity from the data center industry. They're scrambling to keep up with it. They're not used to growing this fast, and it's often their electric transmission network that is falling behind. It's the long distance power lines and substation equipment that the utilities are really trying to react [to] – and to grow alongside the data center industry. But we expect them to fall short; and pretty meaningfully short. You know, this is large scale infrastructure that takes years to develop and build. So, then when it comes to onsite power, as you're growing alongside that constraint or trying to avoid that constraint. We're seeing that data centers, they're very much prioritizing speed. The quicker they can get the power the better. But you know, more and more we're seeing other factors come
- 2 days ago5 min
Will AI Start Making Your Hotel Reservations?
Stephen Grambling explains how changes in booking habits could redirect billions in travel industry spending.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I’m Stephen Grambling, Morgan Stanley’s U.S. Gaming, Lodging, and Leisure analyst.Today: how AI could transform hotel bookings and reshape the economics of the travel industry.It's Monday, November 2nd, at 10am in New York.So, we all love dreaming about and going on vacations, right? But you know what we don’t love as much? Scrolling through dozens of hotel listings, comparing prices across websites, contemplating where and how much we can use our rewards or maximize points or wondering if we’re getting the best deal for the right experience.So, imagine the relief of having an AI assistant understand you and your families’ preferences, all of your status and loyalty points, aggregated details and reviews of all the hotels you’ve ever travelled to and might want to travel to – and all you need to do is evaluate locations? Then it finds the right hotel and books it for you.That future is coming into focus, and it could reshape the economics associated with the marketing and distribution behind the $640 billion global hotel industry.We estimate that every year the lodging industry spends between $22 to $55 billion on marketing. Add roughly $30 billion in fees collected by online travel agencies, or OTAs, and we're talking about $55 to $85 billion in spending that AI could influence.Today, when you book through a third-party travel website, hotels typically pay commissions of 10 to 20 percent if it’s a branded hotel, or 20 to 30 percent if it’s independent. Booking directly through a hotel's website costs the brand closer to only 5 percent. That difference can have a meaningful impact on profitability for their owners.As AI agents increasingly help travelers find hotels, compare options, and potentially book on their behalf we could see a major pivot in brand preference and booking channel. In our analysis of hotel searches across eight U.S. destinations, traditional search engines directed travelers to official hotel websites just 13 percent of the time. With AI-powered searches, that jumped to 97 percent.But perhaps the most interesting finding involves loyalty programs. When we told the AI agent that a traveler belonged to a hotel loyalty program, 100 percent of the resulting links pointed to official hotel websites. When we specified a membership in an online travel agency's loyalty program, the results shifted entirely to that third-party booking platform. That means the AI agent is already factoring in your rewards, memberships and loyalty preferences into travel recommendations.We saw similar effects in Europe.For major hotel brands, this creates a significant opportunity. Their large loyalty programs and established customer relationships could help drive more direct bookings at a lower cost. And even small shifts add up. We estimate that moving just 1 percent of bookings from third-party platforms to hotel websites could boost hotel owners' EBITDA by roughly 0.1 percent to 0.5 percent.Looking ahead, we expect hotel margins to start benefiting from these savings in the second half of 2027, with further gains in 2028.Independent and boutique hotels could also profit as AI gets better at matching travelers with unique properties that fit their preferences. Meanwhile, online travel agencies aren't going away. Their extensive hotel inventories, loyalty programs, and scale in payments and fulfillment remain important competitive advantages.For now, AI-driven referrals still account for only a small fraction of travel website traffic. But as AI platforms develop their own advertising and commission models, the economics could change.So, what does this mean for the travel industry?AI could help hotels attract guests at a lower cost while making it easier for travelers to find the right stay. Hotel brands have an edge with their loyalty programs; whereas online travel agencies can leverage unique inventory, boosting independent hotels. It's too early to declare an outright winner but expect more from us as this battle evolves.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.
- 6 days ago4 min
The Curious Calm of Credit Markets
It appears that credit investors have gotten most of what they’ve wished for over the last decade. Our Global Head of Fixed Income Research Andrew Sheets considers whether there could be unintended consequences.Read more insights from Morgan Stanley.----- Transcript ----- Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.Today, how spooked should we be about the credit markets?It's Friday, October 30th, at 2pm in London.I grew up watching The Simpsons, and I've always had a soft spot for their Halloween episodes. One in particular that's burrowed pretty deep in my memory involves a cursed monkey's paw. It technically granted wishes to whoever held it, but with unintended consequences. For example, Lisa wishes for world peace, the entire planet disarms; and then aliens invade and take over. That sort of thing. Keep that monkey's paw in mind. Credit markets are going through their own jittery episode. After a long period of support, central banks are raising rates and shrinking their balance sheets. Thanks in part to this shift, global yields have risen. And since bond prices move inversely to yields, they've driven negative total returns. Then there's the AI boom, maybe the defining economic story of 2026. Morgan Stanley estimates that close to $900 billion of CapEx will happen this year, roughly double what we saw last year and triple the levels of 2024. And we think this growth continues, with hyperscaler capital expenditures reaching about $1.5 trillion next year – almost the size of the entire U.S. defense budget. All that spending requires financing, and credit markets have been a key source of it. Heavy supply from this relatively new sector – technology – has pushed up both yields and spreads, especially because these issuers have often been willing to price their debt pretty cheaply, relative to the rating. These higher yields haven't slowed down the largest tech companies, given their considerable financial resources. But it has caused ripples further down the chain. Lower-rated credits with more leverage and slower growth are being more impacted by these higher borrowing costs. And the presence of these new technologies has increased fears of disruption to existing business models, especially in sectors like telecom. And as a result, the dispersion between credits has increased. Scary stuff. Or is it? If you'd spoken to a credit investor over the last 10 to 15 years, you would have heard a litany of wishes. If only central banks stopped intervening in markets, compressing credit risk premiums. If only yields weren't so low. If only the growth backdrop was better. These investors wish that the technology sector would finally issue bonds, given its extremely low weight in credit markets, which are heavily skewed towards slower-growing sectors like banks, utilities, and telecom. They wished for new bonds that were highly rated, yet also would have high spreads. They wished for a new issue premium, which had compressed sharply. And maybe, just maybe, in their wildest dreams, they hoped they could get it all. New bonds that were highly rated in a fast-growing sector issued at a large new issue premium. And hopefully a lot of it. They also from a business sense wanted dispersion. The case for active credit management relies on the idea that there are differences in credit performance that a skilled analyst can capture. If everything just moves together, well, just buy the index. We got our wish. Yields are high, with investment-grade credit yielding close to 6 percent in the U.S. and over 4 percent in Europe. Spreads have widened, and there's no central bank intervention to distort this. The AI boom is resulting in record levels of highly rated bond supply in a new sector, often at a significant discount for the rating. And all of this, and more, is driving significant dispersion.Granted, like the monkey's paw, the reality of this wish may feel different from what investors imagined. But unlike it, we don't think this is a Halloween tale. The fact that current conditions check so many boxes of what investors were looking for and address so many underlying needs is a good, healthy thing in our view. The path is hardly straightforward.But for now, we're less frightened of this story. Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today. And of course, Ha
- 1 weeks ago11 min
How Digital Assets Are Rewiring Financial Markets
Our Head of Digital Asset Strategy Amy Oldenburg joins Global Digital Asset Strategist Felix Stratmann discuss how tokenization, regulation, and the convergence of traditional and digital finance could reshape global markets.Read more insights from Morgan Stanley.----- Transcript ----- Felix Stratmann: Welcome to Thoughts on the Market. I'm Felix Stratmann, Global Digital Asset Strategist with Morgan Stanley Research. Amy Oldenburg: And I'm Amy Oldenburg, Head of Digital Asset Strategy. Felix Stratmann: Today, we're looking beyond crypto prices to explore how digital assets could transform the way financial markets operate. It's Thursday, October 29th at 2pm in London. Amy Oldenburg: And 10am in New York. Felix Stratmann: So, we're used to being able to send money, shop, and access information anytime, anywhere online, right? But much of the financial system still operates on infrastructure built decades ago, with limited trading hours and transactions that can take days to settle. Digital assets could fundamentally change that. Amy, your work focuses on how financial institutions put digital asset technology to use. When people hear digital assets, they still mainly think of Bitcoin. But what bigger shift in financial infrastructure are they missing? Amy Oldenburg: One thing I would focus on is – while Bitcoin may have showcased the technology for us, there's a much bigger innovation story here that we need to focus on, and this is really what's going to create the future of efficiencies and new products for our clients. We've seen many other industries get disrupted by innovation and technology. And now it's coming for financial services. And we're really dealing with this in many different ways today. Felix Stratmann: Yeah, and I guess as that infrastructure changes so could the competitive landscape, right? So which parts of the existing financial systems stand to benefit the most, and which could face the greatest disruption from your perspective? Amy Oldenburg: Yeah, I think it's good to look at some of the different points we've seen in history. Even if we think about some of the parallels to the internet era. While many of those early activities were simpler in terms of what happened, just digitizing company information for the first time. We're also seeing that simpler product design happening within digital assets. We're tokenizing equities and we're tokenizing treasuries. And that's simply to get them in digital form. It's really the future of programmability, really embedded in some of these products that will be the powerful force that we'll see in the future. So I think areas where you have high friction and even a heavier administrative burden, that's areas where we may see some of the biggest transformations happen in this space. So Felix, I'm looking at this sector from the strategy side. Curious from your research perspective, where are you seeing the clearest signs of tokenization moving from concept to real market activity today? Felix Stratmann: So I mean, look, we are early in the tokenization game. You know tokenized real world assets are about [$] 30 to 40 billion today. But they're growing quickly. That number was essentially nothing just a couple of years ago. And recently we put out a forecast saying we expect them to reach [$] 2.3 trillion by 2030. What’s driving that? A couple things I would say. Really it comes down to where traditional financial infrastructure has the most friction. One of those areas being collateral management. Getting your collateral where it needs to go, whether that be 24/7 or internationally, this is a big opportunity for tokenized assets. And we're seeing growing interest in and demand for related products like tokenized money market funds or government securities, which are one of the fastest growing areas of tokenization. And again, these can potentially move more easily between institutions or be used as collateral. And this is especially important, I would say, as markets move towards 24/7, right? One thing related to that where we're seeing increasing activity is tokenized stocks. You know, I would say they're not necessarily representing a more efficient state of the equity market yet, but they're an important step towards testing and demonstrating, you know, the benefits of tokenized assets in global distribution and also enhanced utility, right? And then elsewhere, I think, we need to look at digital mon
- 1 weeks ago9 min
Signals to Watch in the U.S. Midterms
With Election Day a week away, our Head of U.S. Public Policy Research Ariana Salvatore and Wealth Management's Monica Guerra explain why the aftermath of the midterms may matter more to markets than who wins.Read more insights from Morgan Stanley.----- Transcript ----- Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley.Monica Guerra: And I'm Monica Guerra, Head of Policy and Geopolitical Strategy for Morgan Stanley Wealth Management.Ariana Salvatore: Today we're going to be talking about the upcoming midterm elections and what investors should be watching from both an institutional and individual investor perspective.It's Wednesday, October 28th, at 10am in New York.Well, Election Day is just about a week away. Investors are obviously increasingly focused on what a potential change in congressional control could mean for markets. And Monica, you and I are kind of grappling with this question through slightly different lenses. And that's why I thought it'd make sense to bring you in today.We both agree that what happens after the election is probably more important than the outcome itself. But let's start with the election backdrop. Your team has developed a Midterm Signal Monitor. What are the indicators telling us?Monica Guerra: Well, Ariana, affordability has really emerged as the defining issue for voters this cycle. Our monitor tracks four indicators positively correlated with midterm election outcomes: the generic congressional ballot, presidential approval, consumer sentiment, and gasoline prices.Democrats lead the generic ballot by about eight points, and presidential approval is 38.8 percent, just below the 40 percent historical reference point when the opposition political party tends to gain momentum.Now, consumer sentiment in October is the lowest of any October before a midterm election in the University of Michigan survey's entire history. And gasoline prices in September were up 37.6 percent from a year ago.So taken together, these signals point to a challenging environment for the incumbent party, really driven by affordability. Persistent inflation, elevated borrowing costs, and renewed energy price pressures tied to the conflict with Iran are all weighing on household purchasing power. But importantly, these are directional indicators, not necessarily a forecast of the election outcome itself.Now, Ariana, when you're looking at the potential outcomes from your perspective, how much do you actually expect to change?Ariana Salvatore: Well, I think that's the key question, right? Because our view has been that the midterms are unlikely to fundamentally change the direction of U.S. policy. And that's because a lot of the uncertainty that markets have dealt with since the beginning of 2025 has come from the executive branch rather than Congress.So, regardless of the outcome, we think things like tariffs, deregulation, immigration, geopolitics, export controls – all of those variables will remain important sources of policy uncertainty. Where congressional control matters more is on fiscal policy.So, a divided government would make new legislation harder to pass, and that could mean more contentious negotiations over things like government funding, the debt limit, and defense spending.So, for institutional investors, it's a little bit less about which party wins and more about what the composition of Congress means for the policy agenda going forward. As well as leadership's ability to really organize and corral different members of the caucus to effectively use their leverage around some of these negotiations.So, Monica, I imagine the questions that you're getting from individual investors may be a little bit different. Talk us through some of those.Monica Guerra: Yeah, they are. I think the biggest question is what the election can mean for an individual's portfolio. And history does offer us some interesting perspective here.So, the S&P 500 has averaged about a 14 percent return in the calendar year following a midterm election, compared with roughly just 3 percent in the midterm year itself. And this year, as we all know, the index has already outperformed that typical second-year trajectory, which could heighten risks and opportunities for sectors sensitive to policy decisions.For example, recent strength in technology and energy combined with the narrow market breadth could amplify policy-related volatility, particularly in industries facing heightened scrutiny under the new Congress.Of course, that's not
- 1 weeks ago11 min
To Hike or Not to Hike
Our Global Head of Macro Strategy Matthew Hornbach and Chief U.S. Economist Michael Gapen look at what could speed up tightening, what’s next for Treasury yields, and how the Fed can skip a hike now while signaling that more are coming.Read more insights from Morgan Stanley.----- Transcript ----- Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley.Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist.Matthew Hornbach: Today, the challenge facing the Fed: to not hike rates while still convincing investors that you think rate hikes are coming.It's Tuesday, October 27th at 11am in New York.So Mike, how do you think the Fed and Chairman Warsh in particular is going to deal with this challenge?Michael Gapen: Well, I think the way that he can do it is to say, ‘Obviously we already did hike. So, we've started a process. You know we're serious about bringing inflation down in a timelier fashion. So essentially the question is: Do we want to raise rates at every meeting or do we want to take an action, assess incoming data and take a different action?’So I do think the message here can be balanced in a way that says, ‘We didn't hike rates today. We didn't feel a tremendous sense of urgency to raise rates today. But we think more work is needed.’ So I'm not sure that there's urgency to raise rates every meeting. But you can still suggest that rates are going to go higher.You can see I'm having trouble articulating the story as well. Warsh may have some of the same difficulty, but I think that's the basic message is – taking an action, assessing its effect, deciding to take another action.Matthew Hornbach: At the Jackson Hole Symposium in August, Chairman Warsh gave a speech, and in the speech, he invoked this imagery of going on a hike around the mountains of Jackson Hole.And he told us that there were, in essence, two types of hikes that one could go on around Jackson Hole. A more leisurely hike and a more aggressive hike around the mountains. Presumably because we don't think the Fed will hike rates at this meeting. Presumably the idea that he has in his head today is to go on a leisurely hike.But if that's the case, how long does a leisurely hike last? How…Michael Gapen: They can both be the same.Matthew Hornbach: … long will the hike be.Michael Gapen: Yes. So I think that I would interpret the leisurely hike also as the difference between, I think, what economists euphemistically call a recalibration of the policy stance – as opposed to a more aggressive tightening cycle.So one's kind of leaning against the wind while the other one is trying to change the course of the economy. So I think you're right. And he called the leisurely hike the Ben Bernanke hike and as opposed to the Don Kohn aggressive hike. That's inside Fed speak if you know your former Fed staff.And I think what the data is telling the Fed, on one hand growth is certainly resilient, and inflation is sticky. But the labor market doesn't look like it's overheating. We're only adding about 50,000 jobs a month. The unemployment rate is low, that's true. But wage growth is actually decelerating.So from my perspective, and I think their perspective, even with the AI investment boom, there's not a lot of evidence the broader economy is overheating. And that's where I think the urgency story fits in. Are they behind? Do they need to get on top of something?I think the answer to that is no. So you end up with this measured recalibration: Hey, we cut 75 basis points last year to support the labor market, should probably reverse those. That's what we should be thinking. We're not thinking we need to go all the way back to 2023 highs, which would be the more aggressive tightening cycle.That's the way I split it out.Matthew Hornbach: So what would have to happen with the weather in Jackson Hole to change the mind of the committee to go on a more aggressive hike? Maybe to get back into the lodge before the weather really turns inclement? What would have to happen in the economic data, do you think, to change their mind?Michael Gapen: Well, I think that the most likely story there. I mean, what macro data would make them do that sooner than later would just be inflation has a lot more momentum than they think. Rather than being flat or decelerating slowly, it actually starts to firm.So, the actual data that they have in hand, they wouldn't even have to decide where it's coming from
- 1 weeks ago5 min
The Next Stage of the Market Correction
Is the end of the correction in sight? Our CIO and Chief U.S. Equity Strategist looks at what could bring this pullback to an end.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Is the end of this equity market correction in sight? Today on the podcast, I’ll share what I think could turn the tide.It's Monday, October 26th at 11:30 am in New York. So, let’s get after itThe correction that began in June is now well advanced beneath the surface. But I believe the high-quality S&P 500 index may still have some unfinished business. Until that plays out, I don’t think we can say the adjustment is complete.The real question to ask: how bad does it have to get before it gets better?We have described this correction as a classic mid-cycle transition. The peak rate of change in earnings revisions arrived right on schedule, about a year after the recession troughed. And the market responded the way that it usually does: early-cycle leaders with more operating and financial leverage started to underperform, while higher-quality, asset-light, services-oriented businesses moved to the front.This quality rotation is now well understood though, and positioning has followed it. Ironically, the final step is usually a convergence between the resilient high quality S&P 500 index and the weaker breadth beneath. We may already be seeing the beginning of that meeting in the middle. If the index does move lower, I believe 7100-7200 on the S&P 500 is where the correction should find material support.The reason I believe we will ultimately have a positive resolution to this transition is that a lot of damage has already occurred. Roughly 60 percent of Russell 3000 stocks are down more than 20 percent since June. And the hit has been even more severe in early-cycle areas like Semiconductors, Autos, Consumer Cyclicals, and Capital Goods.At the same time, hedge-fund positioning has come down meaningfully leaving us near the lows for the past 12 months. That is encouraging, but sentiment overall is not yet at the kind of extreme that typically marks a durable low. I think we are close but we’re not quite there.So, what gets us there? I see three clearing events ahead.The first is AI. Investors are questioning the eventual return on capital, the cost of capital, and whether credit markets can fund all the spending that has been promised. Over the next few weeks, the market will need to absorb more supply, and lower-quality players may continue to see wider spreads and even lower stock prices.I view the supply as the event itself. Once it clears, the risk should begin to fade. Semiconductors remain at the center of this concern, and may offer a good benchmark to monitor for the broader market correction. Specifically, I see another 10 to 15 percent lower for the Semiconductor index into mid-November.The second clearing event is the midterm elections. Markets dislike uncertainty, and this election has plenty. A blue wave is not a surprise anymore though. The larger overhang is what may happen after the vote, including the possibility of a renewed military escalation in Iran.I have no special edge in forecasting geopolitics. But I do know that these kinds of shocks often create very good buying opportunities. Historically, post-midterm returns have been very strong, so I would be ready to embrace a sharp downdraft in stocks in the days and weeks around election day.The third, and most important, clearing event is liquidity. Financial conditions have tightened sharply through a combination of higher rates, slower balance-sheet growth, stronger demand for capital, and higher energy prices.The tightening is beginning to resemble 2018, and it is not far from what we experienced in 2022 despite very modest tightening from the Fed so far. In fact, the market may be doing the Fed’s tightening for it; and if that tightening begins to create funding stress or destabilizes credit markets, the Fed and Treasury have tools to respond. The question is whether conditions need to deteriorate further before they act.Bottom line, I think the correction in equity markets that began in June is in the final stages, but the final stage can be very uncomfortable. We may still need one more index-level drawdown and bout of volatility. Or one more moment when investors conclude that something has broken. That may be exactly what clears the path for the Fed to pivot and the next leg higher for stocks.For now, I want to stay with quality stocks that have already corrected more than the index in areas li
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Is this an official Thoughts on the Market product?
No. Podzilla is an independent service that summarizes publicly available podcast content. We're not affiliated with or endorsed by Morgan Stanley.
Can I get summaries of other podcasts too?
Absolutely! The free plan covers up to 3 podcasts, any in the catalog. Basic raises that to 15, Pro to 40 and Max to 100. Browse our full catalog at /podcasts.
How often does Thoughts on the Market release new episodes?
Thoughts on the Market publishes daily. Our AI generates a summary within hours of each new episode.
What topics does Thoughts on the Market cover?
Thoughts on the Market covers topics including Business, Investing. Our AI identifies the specific themes in each episode and highlights what matters most to you.
Start getting Thoughts on the Market summaries tomorrow morning.
Free forever for up to 3 podcasts. No credit card required.
Free forever for up to 3 podcasts. No credit card required.